Atlantic Yards Becomes a Question Mark

The rising costs have particular significance for Atlantic Yards, as its projected returns were apparently very marginal, especially for a development of this size.

A state-commissioned study by accounting giant KPMG, intended to replicate Forest City’s business plan in 2006, found that the internal rate of return—more or less the annual yield on an investment—was a mere 7.28 percent on the housing and office space component of the project, and just 5.09 percent on the arena. (In Forest City documents obtained in a lawsuit filed by Assemblyman James Brennan, the company put its own projections slightly higher, at 9.6 percent and 7.7 percent, for the mixed-use component and arena, respectively).

Risky, large-scale projects typically have much higher returns, and one of the bidders for the 26-acre West Side rail yards—a semi-comparable project on property also owned by the Metropolitan Transportation Authority—said the planned project’s internal rate of return was more than 15 percent.


TO EASE the financial pressures on the project, Forest City is attempting to change some terms with various city and state agencies, according to multiple people familiar with discussions.

The developer is due to owe the M.T.A. $100 million when it closes on the three-block Vanderbilt rail yards, an act that is slated to happen after the eminent-domain litigation is completed. But financing is nearly impossible to find and Forest City is hardly swimming in cash. Thus, according to one person familiar with talks, the developer has asked the M.T.A. to restructure the payments so it does not pay the full $100 million upfront.

The developer is seeking the converse from the city, which owes Forest City a total of $100 million in direct payments to be spread out over time. About $40 million of this sum has already been paid to Forest City, and according to multiple people familiar with discussions, the city is considering speeding up the payments on the balance.

As for the housing component, much of which is for families with low or middle incomes, Forest City is in discussions to add on additional affordable-housing programs or incentives beyond what it outlined in 2006, bringing greater subsidy to the apartments. According to the KPMG report from 2006, the developer outlined three main programs to subsidize the housing: a tax abatement program known as 421-a; the Federal Low-Income Housing Tax Credit Program, which is providing less valuable credits than it did in 2006; and tax-exempt bond financing through a middle-income-housing program set up by the city.

(Spokesmen for the M.T.A., Empire State Development Corporation and the city declined to comment on negotiations.)

And in terms of the private sector, the developer is seeking to extend a loan with Gramercy Capital on Forest City–owned property in the project’s footprint, slated to come due in February. The large bridge loan—a $152 million loan from Gramercy was listed in property records—was originally intended to be rolled into a larger financing package that Forest City would have obtained before construction started, according to an executive involved with the loan.

In a statement, Bruce Ratner expressed a commitment to the project.

“As the country weathers the worst financial crisis since the Great Depression, it should come as little surprise that there are real challenges to development,” he said. “With our partners we are working even harder to make sure Atlantic Yards goes forward. And we’re confident that it will.”

Indeed, there are some bright spots—Forest City claims it still has a commitment from Barclays Bank for naming rights, a sum reported at about $20 million a year that could be financed to bring in more money, for instance. But, overall, the risk of Atlantic Yards has become quite apparent in the past two years, as the low projected returns were revealed and the price tag increased, if the original numbers are to be believed.

“Had those numbers been disclosed way at the beginning, somebody could have said, ‘Hey, you’re way off,’” said Mr. Brennan, the Brooklyn-based assemblyman who forced disclosure of Forest City’s business plan for the project. “Had they been disclosed in 2004, or had there been an authentic public process … and a transparent approach that included the community, I think there would have been an immediate recognition that the [viability of the] affordable housing was problematic.”

Atlantic Yards Becomes a Question Mark